Saturday, January 23, 2010

Back to 2004

There have been approximately 7.2 million jobs lost--as measured by total nonfarm payrolls--in the United States since the start of the recession in December 2007. This is same number of jobs the U.S economy had back in March 2004. This staggering reversal in employment can be seen in the figure below (click on figure to enlarge):

The total 7.2 million jobs lost can be broken down into the following industries (click on figure to enlarge):

Note that the education and health care industries have actually gained jobs during this time. Finally, it is useful to take a look at the cumulative % change in jobs over time in this recession (click on figure to enlarge):

Interestingly, the natural resource and mining sector continues to grow through the first quarter of 2009 (though the rate of growth flattens and then begins to decline around mid-2008). After that, however, every industry sector other than education and health care either outright declines in employment growth or, in the case of government, slows down. I may be reading too much in the figure, but what I see is that the recession starts off as an Arnold Kling recalculation event but by mid-to-late 2008 it turns into a Scott Sumner aggregate demand collapse.

7 comments:

I wonder if the education employment statistics, and maybe unionized health care, are inaccurate. In education, and possibly in unionized medical workers, it is possible to accumulate vacation, personal and unused sick days. When employees are terminated, they are entitled to pay for all or part of their accrued days. Some employers continue to keep the employees on payroll and payout the accrued days as salaries instead of lump sum payments at time of layoffs.

Workers might appear to be employed when in fact they no longer have jobs.

You know, sometimes Kling claims that the problem is that we know what we don't want to produce, but we don't know what we do want to produce. And so, we are waiting to think of something that we want to produce. I find that reasoning inconsistent with scarcity.

Other times, he makes the more plausible argument that we produced too much of some things and need to switch to producing other things. I think that is true, but as you mention, the drop in just about everything really looks like the problem is the drop in nominal expenditures and next to no drop in prices or wages.

At the risk of repeating some points I made in a previous post, in my opinion three important facts stand out in the determination of whether the unemployment the economy is currently experiencing is primarily structural or cyclical.

1) Employment Dispersion If the source of unemployment were structural we should see great dispersion between sectors in terms of employment growth such as we saw in the 1974-1975 recession. That is not the case. Every sector with the exception of utilities, educational and health services, and government, has suffered large declines in employment (about 7%-23%, as shown above). Employment growth dispersion in this recession is unusually small lending strong evidence that current unemployment is overwhelmingly cyclical, not structural.

2) Job Openings RateNot surprisingly, given the lack of disperson in job growth, employers are having little difficulty filling openings. The job vacancy rate has plummeted in this recession from 3.4% in mid 2007 to 1.8% (an all time low) in July 2009 before rising to its current rate of 1.9% as of September. This is hardly consistent with the sectoral imbalance point of view.

3) Unit Labor CostsGiven that employers are having little trouble filling vacancies it should come as no surprise that compensation is no longer rising faster than productivity as would be consistent with a positive inflation rate target. ULC rose by 1.6% annually on average in the ten years through the fourth quarter of 2008. It has fallen every quarter since, down 1.9% as of the third quarter of 2009. This also is not consistent with the structural hypothesis.

Scott Sumner is right. The real problem is not a structural problem at all. The real problem is a cyclical problem. When the growth rate of nominal GDP falls sharply (currently down over 8% below trend) there is going to be a severe recession. This is a severe nominal shock. In such situations, there are always some people (Kling, etc.) to whom it looks like the real problem is a structural problem. But the structural problem is itself the symptom of a monetary shock, such as financial panic.

Even a major misallocation of resources such as the housing and financial sector boom of 2003-06 did not cause a big enough recalculation to create a major recession. The initial downturn in housing was handled without so much as a stumble, with only a minor increase in unemployment between mid-2006 and mid-2008 despite a 40% decline in residential investment and a 25% reduction in real housing prices (according to Shiller's historical housing price index). The big jump in unemployment more recently was simply caused by a sharp fall in nominal GDP, in other words, tight money.

Yes, it seems hard to conclude anything other than a cyclical swing in employment given the broad-based decline in jobs. I am glad you brought up those structural employment criteria again as I have been thinking about the 2003-2004 employment situation more. I hope to post on it soon.

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About Me

I am an assistant professor of economics at Western Kentucky University in Bowling Green, Kentucky. I am using this blog as an outlet to express my ideas, concerns, and questions on macroeconomics and markets.